Chapter 2: Time Value of Money

2.1: (b)
Given: P = $2,000, i = 12%, N = 7 years
Find: F
F = $2, 000(1 + 0.12)7 = $4, 421.36

2.2: (d)
2.3: (b)
Given: A0 = $800, A = $1,500, i = 10%, N = 10 years
Find: F
Note that there are two cash flow components in the series. The first one is a
single payment amount ($800) at period 0 and the other is the $1,500 equal
payment series. Also we are looking for an equivalent value of these payments at
the end of year 10, not year 9. Therefore, we may solve the problem in two steps.
First find the equivalent future worth of the single payment at period of 10. Then
find the equivalent future worth amount of the $1,500 payment series at the end of
year 10.
Single-payment:

V1 = $800( F / P,10%,10)
= $2, 075
Equal-payment series: First find the equivalent future worth of the series at the
end of year 9 and multiply this amount by (1.1) to obtain the value at year 10.
V2 = $1,500( F / A,10%,9)( F / P,10%,1)
Total

= $22, 406
F = V1 + V2 = $24, 481

2.4: (d)
Given: P = $100,000, i = 6%, N = 10 years
Find: A and portion of the principal payment in the 2nd year

A = $100, 000( A / P, 6%,10) = $13,586.80

First Year:
I1 = $100, 000(0.06) = $6, 000
P1 = A I1 = $7,586.80
B1 = $100, 000 $7,586.80 = $92, 413.20
Second Year:
I 2 = $92, 413.20(0.06) = $5,544.79
P2 = A I 2 = $8, 042.00
B2 = $92, 413.20 $8, 042.00 = $84,371.19
Fraction of the payment:
$8,042.00
= 59.19%
$13,586.80
2.5: (d)
Given: A = $400, i = 8%, N = 15 years
Find: F
With the end-of-year deposits:
F ' = $400( F / A,8%,15)

= $11,730

With the beginning-of-year deposits: Since each deposit has one-extra year of
interest earning, the

F = $11,730(1.08) = $12,668
2.6: (b)
2.7: (b)
Given: cash flow series given, i = 10%, N = 5 years
Find: X that makes two cash flow series equivalent
Approach: Anything of this nature is to establish a base period for equivalence
calculation. You can pick any time period, period 0 being most common, though.
For example, if you pick n = 0 as your base period, then compute the equivalent P
for both cash flow series, equate them, and solve for unknown X.
Present value for cash flow series 1:

P1 = $100( P / A,10%,5) $50( P / F ,10%,3) $50( P / F ,10%,5)

= $447.69
Present value for cash flow series 2:

P2 = $100( P / F ,10%,1) + X ( P / F ,10%, 2) X ( P / F ,10%,3)

200( P / F ,10%, 4) + X ( P / F ,10%,5)
= 0.69 X $45.69
Let P1 = P2, and solve for X:

P1 = P2
$447.69 = 0.69 X $45.69
X = $715.04
2.8: (a)
Given: deposit series given, i = 10%, N = 8 years
Find: F

F = $450( F / P,10%,8) + $200( F / A,10%, 7)( F / P,10%,1)

$500( F / P,10%,5)
= $2, 246.54
2.9: (d)
Given: P = $20,000, i = 10%, and N = 8 years
Find: the required payment, A
Approach: Since there is one missing payment at the end of year 3, we may
modify the repayment series by adding the missing payment and subtracting the
missing payment in the same year. The net change is zero, but this will allow us to
use the (A/P,i,N) factor.
$20, 000 = A( P / A,10%,8) A( P / F ,10%,3)

= 5.3349 A 0.7513 A
= 4.5836 A
A = $4,363.40
2.10: (c)
Given: cash flow series given, i = 10%, N = 10 years
Find: F
Method 1: Find the effective interest rate per payment period, which is over a 2year period. Then use the following equation to establish the equivalence.

ie = (1 + 0.10) 2 1 = 21%
F = $200( F / A, 21%,5) = $1,517.85

Method 2: Find the equivalent annual depositin other words, what annual
deposits (A) over two years would make a single $200 deposit (A) every other
year?

A ' = $200( A / F ,10%, 2) = $95.24

F = $95.24( F / A,10%,10) = $1,517.85

$200
0

$95.24 $95.24

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